Bitcoin (BTC) is the leader of a fledgling asset class known as "cryptocurrencies." Developed and launched in 2009 by a programmer under the alias "Satoshi Nakamoto," it is an exclusively digital form of money accepted around the globe.
BTC is a decentralised peer-to-peer mode of exchange that is supported by blockchain technology. Through the elimination of intermediaries, it offers increased transaction speeds, low fees and anonymity to users. The value of BTC is determined by the open market. Because it resides in cyberspace, there is no central banking authority or governmental body to influence its pricing.
BTC is commonly valued in terms of the world's reserve currency, the U.S. dollar (USD). Spot valuations of the BTC/USD are determined by cryptocurrency exchange participants on a 24/7 basis. The cryptocurrency exchange Coinbase is the largest venue for trading BTC denominated in U.S. dollars.
Numerous online services provide ongoing exchange-based pricing indices for the BTC/USD. As the popularity of BTC has grown, valuations have increased from mere pennies to more than US$15,000 per BTC.
In addition to the cash market, contract-for-difference (CFD) products based on the BTC/USD are actively traded. Bitcoin CFDs are derivative products that allow traders to engage the BTC markets without assuming ownership. This process is less capital intensive as leverage may be applied to smaller account balances to control greater quantities of the underlying asset.
During late 2017 and early 2018, several prominent derivatives exchanges launched BTC futures contracts denominated in U.S. dollars. The CME Group, Cboe and Nasdaq all entered the BTC market, with offerings similar to currency (FX) futures. As a result, BTC futures are traded alongside currencies, energies, metals and agricultural products.
Volatility is a consistent presence in BTC/USD valuations. For a 24-hour period, it is common for pricing to fluctuate between 5% and 10% of aggregate value. The high degrees of volatility are attributed to the finite supply of BTC. The maximum number of BTC allowed in circulation is limited to 21 million, a value determined upon its launch in 2009.
In contrast to fiat currency, the only means of adding new BTC to the active supply is through a process known as "mining." BTC miners use analytical technologies to perform advanced calculations that facilitate transactions on the blockchain. According to a graduated scale, miners are awarded various amounts of new BTC for their services.
The limited introduction of fresh BTC into circulation influences the BTC/USD greatly. With a working supply of more than 16 million bitcoins, maximum capacity has almost been reached. Ultimately, its finite supply creates a perception of scarcity and serves as a primary driver of its valuation.
In comparison to the USD, BTC is in its infancy. Questions pertaining to supply, security and regulatory status have given rise to consumer skepticism. While traditional currency market influences such as central bank actions or economic fundamentals may not apply to BTC, the USD remains subject to all of these factors. When the USD falters, it is likely to lag against other global majors as well as BTC.
Key Facts: USD/BTC
- Currency overview: BTC is the most valuable cryptocurrency, available to anyone with internet access worldwide. More than 16 million of a possible 21 million BTC are already in circulation. BTC is most heavily traded in the U.S. and E.U., but individuals from around the globe engage its cash market and trade it freely on a daily basis. While BTC is denominated in many international currencies, the BTC/USD is the industry standard.
- Currency code: BTC
- Central bank: No central bank for BTC exists.
- History: BTC was introduced in 2009 by a computer programmer under the alias Satoshi Nakamoto. Initial values were miniscule, but within ten years one BTC appreciated to be worth more than US$15,000. Functionality and the dramatic rise in value led many countries, including China and Russia, to restrict or ban BTC exchanges outright. Eventually, several derivative products based on its value gained popularity among traders and investors.
- Economy: BTC is an exclusively online asset. No physical economy is applicable. Nonetheless, it boasts a market capitalisation of more than US$250 billion.
- Currency subunits: The smallest increment of BTC is to eight decimal places, .00000001.
- Denominations: All fractions of 1 BTC up to eight decimal places may be transferred into nearly any global currency.
- Countries and territories using BTC: It may be used anywhere there is internet connectivity, worldwide.
United States dollar (USD)
- Currency overview: The USD is the official currency of the United States and its inhabited territories. The USD is a decimalized currency, as one dollar consists of 100 subunits called "cents." The USD acts as the world's reserve currency, with 62% of global foreign exchange reserves held by central banks being denominated in USDs.
- Currency code: USD
- Central bank: United States Federal Reserve
- History: The Coinage Act of 1792 put into place the United States' first organized monetary system. Paper banknotes (dollars) were introduced into circulation in the mid 1800s, via creation of the US Treasury by Congress. The Federal Reserve act of 1913 created the central bank of the US, the Federal Reserve. Through the introduction of the Bretton Woods monetary system in 1944, the USD became the world's reserve currency.
- Economy: The United States economy is considered to be a "mixed" economy, with both private industry and governmental intervention contributing to the overall economic output. The US accounts for nearly 25% of global GDP annually.
- Currency subunits: 1 USD consists of 100 cents
- Denominations: Bills: $1, $5, $20, $50, $100; Coins: 1c, 5c, 10c, 25c, 50c, $1
- Sixty-six countries peg the value of their currency to the USD, or directly use the USD as their national currency.
- Four currency pairings including the USD are referred to as "majors." USD/JPY, GBP/USD, USD/CHF and EUR/USD.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…